Online tax bill due for smokers By Larry Copeland, USA TODAY William Blakemore is a pack a day smoker in Hightstown, N.J., who started buying cigarettes online several years ago. His goal avoid his state’s cigarette tax, which has tripled since 2002 to $2.40 a pack, the nation’s second highest.

But the bill suddenly came due last week when Blakemore opened his mail and found a claim from New Jersey for $1,842.79 in back taxes from his Internet purchases.

Blakemore, 55, an unemployed computer programmer, has been buying Benson & Hedges online for $29 a carton, compared with the $50 $60 he would have paid at a convenience store or supermarket. The tax notice, he says, “kind of raised the adrenaline level. That got my dander up.”

Blakemore is one of thousands of smokers getting letters from state and local tax collectors demanding they pay up for their Internet purchases.

The governments want the taxes to support budgets that are stretched thin and to level the playing field for conventional retailers, who must collect taxes on every pack sold.

Smokers increasingly are turning to the Internet because state and local taxes in some areas account for more than half the cost of cigarettes.

People who evade cigarette taxes by buying online are part of a broader pattern in Internet commerce.

According to a study last year by economists at the University of Tennessee, state and local governments in 2003 lost an estimated $15.5 billion in taxes that went uncollected from Internet sales.

As e commerce expands, that loss is expected to grow to $21.5 billion to $33.7 billion by 2008, the study predicted.

“Despite the fact the e commerce boom tended not to be as robust as people thought, it still amounted to a significant revenue loss for the states,” says William Fox, professor of economics at the university and co author of the study.

Collecting sales taxes on goods bought from mail order and Internet businesses has frustrated state and local governments for more than a decade. The Supreme Court ruled in 1992 that states could not force businesses outside their borders to collect their sales taxes unless the companies have stores or headquarters in those states. The ruling spared such businesses from having to comply with the tax codes of 45 states and the District of Columbia that levy sales taxes.

Many states are collaborating on a uniform tax system that would make it easier for online retailers to collect sales taxes on goods they sell. The Streamlined Sales Tax Project would let retailers determine the proper state and local tax rates by entering the customer’s ZIP code. The project has been enacted or partially enacted in 20 states.

Government’s power to find people who thought they had surreptitiously purchased cigarettes without paying taxes dates to a 1949 federal law. The Jenkins Act requires vendors that ship cigarettes to another state to provide customers’ names and addresses to taxing agencies in the receiving state, which then can levy taxes.

Most Internet cigarette vendors do not comply with the Jenkins Act, says Kurt Ribisl, an associate professor at the University of North Carolina School of Public Health who studies tobacco marketing on the Internet. Ribisl says he found 775 Internet sites selling cigarettes.

Among states and cities targeting online buyers

&#8226 The Pennsylvania Department of Revenue sent letters to 63 people last month, demanding payment of $1.35 per pack they bought from two Web sites, spokeswoman Stephanie Weyant says. By Friday, 44 had paid.

&#8226 The Ohio Department of Taxation sent letters to 25 customers of one Internet vendor, seeking unpaid taxes ranging from $400 to $800, spokesman Gary Gudmundson says. Tax collectors there plan to send 1,000 more letters.

&#8226 New York City mailed bills in January to 3,700 people. By Friday, 2,010 had paid $680,000 of $1.2 million owed. That’s a small amount in a city that collects $18 billion in taxes every year.

“But this is not so much about the money as it is about our local retailers, who are put at a competitive disadvantage” if they have to collect the taxes and Internet vendors don’t, Finance Commissioner Martha Stark says.

In addition to a $1.50 state tax per pack, the city adds another $1.50, making cigarettes in New York City the nation’s most expensive.

Sheila Hansen of Manhattan says she got a letter from the city demanding $900 in unpaid taxes on 50 cartons of Kool Milds she bought over three years. Hansen says the city reduced her bill to $750 after she pointed out record keeping errors. But last week, she got another bill a $525 claim from New York state.

“I was totally shocked,” she says. Hansen says she stopped buying cigarettes online and quit smoking before she got the first bill.

“My biggest beef is, unless they go after every single person that buys anything on the Internet and doesn’t pay taxes, it’s not fair,” she says. “Right now, they’re only targeting smokers.”